Is Global Minimum Tax Good For India? Probably, But Lots Of Homework Must Precede A Deal

India should be in no rush to endorse the G-7 finance ministers’ consensus on targeting a minimum global corporate tax rate of 15 per cent reached last Saturday (5 June).

This tax rate, targeted mostly at US and European companies headquartered in tax havens or low-tax jurisdictions like Ireland (12.5 per cent corporate tax), is widely seen to be about ensuring that Big Tech pays more taxes. Put simply, this means Google, Facebook, Amazon, Apple, Microsoft and suchlike companies which hold their profits in low-tax areas.

This minimum tax rate, if agreed, will also mean countries like India will have to abandon their equalisation levies on digital companies that offer services in India but pay no income taxes (read what this deal is about here).

A few points are worth noting here.

One, even though the statement on 15 per cent minimum corporate tax is the headline, it will take years for the world to figure out how exactly this 15 per cent is to be calculated and on what part of whose income. There is no unanimity even in the OECD (Organisation of Economic Cooperation and Development, the rich countries’ club) about this, even though the G-7, a sub-set of the OECD, has announced the figure.

Tax-light geographies like Ireland, Netherlands, and some of the smaller OECD countries like Singapore will surely have something to say about the final minimum tax rate.

Two, a key part of the minimum tax deal is about estimating what part of a global company’s income can be said to emanate from the geography in which it sells its products. How will India, for example, estimate how much of Google’s income is attributable to sales in India when we don’t know the part about what costs are logically apportioned to India, and how IPR (intellectual property rights) payments are accounted for.

Rules of transfer pricing have to be agreed by many countries before any country can reasonably estimate how much of a global company’s income it can tax in its jurisdiction.

Three, as a net consumer of digital and other products, India could well gain from the 15 per cent minimum tax on global tech. But this will happen only if India can develop huge expertise in the highly technical areas of estimating incomes in geographies based on global cost structures and IPR royalties payable outside India.

Trying to gouge incomes through domestic tax terrorism on global companies will not help our cause. Our effort must be driven by intricate knowledge of how transfer pricing and profit apportionment works in global companies.

While negotiating the minimum tax deal, India should be particularly careful to protect the interests of India’s software and digital services industry, which derive most of their incomes from north America and Europe, and also our pharmaceuticals industry.

Big Tech is the main target of this new tax, and India’s manpower-based software services industry need not be negatively impacted by it, but once they start developing platforms and products like Big Tech, they too will face some impact. It is difficult to foresee what will happen then, but India’s negotiators must keep their interests in mind.

We have huge interests here both domestically and globally, and no deal should impact these players negatively. It is worth noting that India willingly signed many free trade agreements (FTAs) with many countries but it has hardly benefited significantly from any of them. This is because we did not negotiate hard and with enough competence from our side. We cannot let this happen with the minimum tax proposal.

Four, there is a strong possibility that if there is no OECD consensus reached in reasonable time, the US will try to brazen its way through by applying its own set of rules to everybody. India should resist this, but by building a multilateral coalition to prevent the US from riding roughshod over the world just because it can do so.

Five, the biggest gain in any global minimum tax regime is not necessarily the potential immediate rise in revenues, but the greater access to shared information on revenues, sales, profits and cost structures. It is this additional information that will help long-term revenue growth.

Six, India should also insist on a longitudinal study on how the system is working after every three years. There should be an opt-out regime, where any country that does not gain additional revenues over a period of time should be given the right to opt out and decide its own tax rates.

This won’t be easy, but today’s pushback on globalisation and technology-led growth regimes is precisely because the world does not bother to look after the losers. It is time to avoid the mistakes of the past.

A regime that is supposed to benefit everybody cannot be justified if it leaves behind a large number of losers, even if they are in a minority. Gains in the aggregate are not a justification for losses in some of the constituent parts.